What do rising interest rates mean for graduates with student debt?

With speculation in the news that interest rates could be on the rise, many student loan borrowers are wondering how rising rates might affect their student loans. Below, we cover the various ways in which student loan borrowers might be impacted by rising interest rates.

Why a Rise in Interest Rates?

The Federal Reserve, often referred to simply as the Fed, is an independently operated entity. Congress is responsible for overseeing the Fed, which is operated by a Board of Governors appointed by the president of the United States and subsequently confirmed by the Senate. That board, which is comprised of seven people, along with economists and support staff are responsible for composing policies that are designed to keep the economy stable. Ultimately, those policies are meant to safeguard the country’s financial and monetary system.

In addition, the Fed serves as a central bank for the country while ensuring that the nation’s financial systems operate in a way that protects consumers and the economy. One of the ways in which the Fed does this is by managing interest rates through the Federal Open Market Committee.

During times in which the country experiences an economic struggle, the Fed may take action by lowering interest rates. This is usually done in an effort to help the struggling economy. Conversely, the Fed may sometimes opt to raise interest rates in an effort to slow down the economy by making it more difficult for consumers to borrow money. This sometimes occurs if the Fed feels the economy is growing at too rapidly a pace.

Federal Student Loans

Whether your federal student loan is impacted by rising interest rates depends on a few factors.

Student loan borrowers who have loans that were originated prior to 2006 could be affected based on whether their Federal Stafford Loans were variable. That was based on such factors as whether you were in school, in repayment, or within the grace period. For loans that have a variable interest rate, you could experience an increase in your monthly payments. Current student loan borrowers with federal loans generally would not be affected by an increase in interest rates. However, Congress sets federal student loan interest rates each year. Rising interest rates will increase the costs of borrowing for future students.

Private Student Loans

The group most likely to experience the pain of rising interest rates is those with private student loans. This is particularly true if you have a variable rate loan. Those who have a fixed interest rate will not feel the pinch of rising rates, as their monthly loan payments will remain the same. For variable interest rate loans, that is not the case, however.

In the event that you do have a private student loan with a variable interest rate, you may wish to consider refinancing your loan to take advantage of a fixed interest rate. This strategy would allow you to hedge against rising interest rates in the future. The only instance in which this might not be the best course of action would be if you know you can pay off your student loans over the next couple of years. In this type of situation, a variable interest rate could potentially save you money, as it is usually lower than a fixed rate.

When it comes to student loan interest rates, most borrowers will not be impacted by an increase. Only those who have refinanced to a variable interest rate loan and private student loan borrowers will experience an impact because of increasing interest rates, and even then, the effect is likely to be relatively small.

Refinancing

One of the first ways in which student loans might be affected by rising interest rates is through refinancing. Many student loan borrowers seek to manage their student loan debt by refinancing their loans to a lower interest rate. This can be a good option if you have multiple loans and at least some of those loans have a high interest rate. By refinancing your loans, you can often roll them into a single loan with a lower interest rate, resulting in lower monthly payments. Along with paying less per month for your student loans, refinancing also presents the opportunity to pay off your loans faster and pay less over the duration of your loan term. Those benefits could be reduced if interest rates should rise in the future.

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